Creditor cites police to fight bankruptcy

Saturday

Dec 15, 2012 at 12:01 AM

STOCKTON - The huge turnout of recruits this week hungry for jobs as police officers in Stockton serves as ammunition for creditors seeking to convince a judge that the city is nowhere near eligible for bankruptcy protection.

Scott Smith

STOCKTON - The huge turnout of recruits this week hungry for jobs as police officers in Stockton serves as ammunition for creditors seeking to convince a judge that the city is nowhere near eligible for bankruptcy protection.

That is one argument posed in court papers filed late Friday by Assured Guaranty Corp., a Wall Street creditor that stands to lose hundreds of millions of dollars in Stockton's bankruptcy case.

The creditor challenged the assertion by City Manager Bob Deis that Stockton can't touch its pension manager, the California Public Employees' Retirement System, out of a fear that such a shake-up would make it impossible to attract police recruits.

Attorneys for the bond insurer argued that the city this year, amid its turmoil and slashed wages, has hired 70 new officers. This week, 1,300 applicants swarmed to town for a physical fitness test.

Research shows, Assured says, that young employees don't think about pensions.

Rather, Deis maintains a "hands off" approach to CalPERS, which looms as a threat to the city's financial stability for years to come, attorney Jeffrey Bjork says in court papers, adding that Stockton hasn't cut enough to prove bankruptcy is the only option left.

"The law is clear," he said. "Chapter 9 is not a resort - it is the last resort."

The filing comes in a showdown brewing between Stockton and its capital market creditors, such as Assured, National Public Finance Guarantee Corp., Wells Fargo and Franklin Advisers Inc.

Stockton filed for bankruptcy June 28, but before it can restructure its finances under the Chapter 9 provisions, the city first has to prove that it is eligible. This entails proving that it is broke and that it first did everything possible to avoid bankruptcy.

That's where objections arise from the creditors who insured the massive debt Stockton incurred.

The creditors contend that Stockton did not negotiate with CalPERS before filing bankruptcy. Rather, city officials seek to make the capital market creditors pay the price of years of mismanagement and overspending inside City Hall.

Written objections to the bankruptcy had to be filed by Friday.

Stockton spokeswoman Connie Cochran said in a prepared statement that the city did not wish to argue its case in the media. City staff intends to study the creditors' arguments and do what is best for the health and safety of Stockton residents, she said.

Assured, in its 35-page objection, argues also that Stockton didn't attempt to raise money by selling off unused property or raise taxes.

The city conducted a poll after filing Chapter 9, which showed voters would support a tax hike and raise $18 million a year, court papers say.

"However, to date, no initiative has been put before the city's voters," Bjork said. "Worse yet, no tax increase has ever been considered."

The creditors commissioned four expert reports to be written, which form the basis of their arguments but were not part of the filing.

They found that the city continues to subsidize its sports and entertainment venues at $2.4 million, and the libraries cost the city nearly $4 million. The city is revamping its Community Development Department at a cost of $1 million, Assured said.

While managing Stockton's crisis, Deis fails to distinguish between the "nice to haves" and the "must haves," Assured argues.

Stockton continues to overpay its employes with the flawed comparison to other cities, such as Chula Vista, saying that the marketplace requires this to attract and maintain people with particular skills, the creditor said.

"Rather than implementing viable but politically unpopular long-term structural reform, the City Council continues to put Band-Aids on a much larger problem involving its cost of labor," Bjork said.

The tardiness of Stockton's financial reports and the revelation taken up at the year-end council meeting last week that Stockton has a $6 million positive balance proves that Stockton has no grasp on its finances, critics say.

"Although somewhat leaner than in years past," Bjork said, "the city's continued spending decisions do not reflect an organization committed to making the difficult choices needed to address its financial distress."

The question over Stockton's Chapter 9 eligibility is scheduled be taken up next before U.S. Bankruptcy Judge Christopher Klein at a hearing Feb. 26.